ZFSVF - Zurich Confirms Its Strong Financial Position

2023-05-18 05:24:09 ET

Summary

• The P&C insurance revenues grew strongly and were supported by price hikes.
• Solvency II ratio still at the top among its EU top-peers.
• Proactive capital allocation and an ongoing buyback to support Zurich's share price development.

Zurich Insurance Group (ZURVY) just released its Q1 2023 financial figures. This year, we already commented on the Swiss insurer twice analyzing first the company's Fiscal Year 2022 results and then providing our insight on Zurich's exposure versus Credit Suisse AT1 and senior bonds. In addition, in our latest publication, we also emphasized how the new ' IFRS 17 regulation Might Provide An Upside ' to the current stock price. Even if Zurich's share price is lower than our last analysis, the company already paid its dividend per share. Therefore, total return performance was higher than the S&P 500 changes in the last month.

Our buy case is supported by a positive MACRO view of the insurance sector. As already reported in Allianz's latest publication , in a world with negative interest rates, insurance companies have focused on cost optimization. If we are looking to the past, insurer players were recording cash surplus on investment activities and reinvestment yield; however, since rates significantly declined their aim moved to the core operating activities.

Last year, we provided a 10-year analysis of the main financial metric with a focus on the combined ratio ((CR)) quarterly development. The lower the combined ratio more profitable is the company. Currently, here at the Lab, we are confident in the sector thanks to a double benefit 1) stable combined ratio and 2) higher reinvestment yield.

On a MICRO basis, aside from the juicy dividend payment, we were forecasting 1) a higher growth on the P&C division thanks to pricing action, 2) a haven currency, 3) no exposure in Russia/Ukraine, 4) a strong Solvency ratio requirements and 5) better performance in the Farmer division (from Achilles heel to an earning engine). For the MACRO and MICRO reasons, our internal team increased 2023 estimates (we are also above Wall Street expectations) and today (once again), after having reviewed the Q1 update, we reiterated our buy rating target at CHF 475 per share.

Q1 analysis

As a reminder, the Q1 Zurich release does not provide profitability metrics. However, the CEO confirmed the 2023 targets which are well supported by a solid start of the year. Going back to our investment thesis, Property & Casualty division top-line sales were up by 7% thanks to solid growth on a like-for-like basis as well as by a higher price. Improvement in pricing was also recorded in the Farmers' segment, which was down in gross written premiums by 3%. This was due to the commercial rideshare business. Zurich's new Life division had $265 million of contractual service margin on a quarterly basis and new premiums were up by 23%.

Still related to our MICRO buy case recap, we should mention the strong capital position of the Swiss insurer. In detail, the Solvency II ratio reached 258% in March-end and remained above the regulatory requirements set at 160%. Zurich has the highest ratio among the EU top-tier insurance players. However, at year-end, the company had a 267% ratio. This reduction was driven by lower interest rates and unfavorable equity market movements.

In the meantime, Zurich reached a reinsurance agreement for the Farmer's life insurance. Thanks to a proactive capital allocation, the ceding commission is over 16x the remittance payments and the company will get $1.8 billion (after tax) in proceeds. Still related to the quarterly transaction, the Group also agreed to sell its Chilean annuity book to Ohio National Seguros de Vida S.A. Both these deals are still subject to the regulatory green light. Today, Zurich has a simplified structure with global leadership positions in commercial lines in the EU as well as in the USA.

Conclusion and Valuation

Following the IFRS 17 implementation and the ongoing share buyback, we are not expecting earnings dilution and we are still forecasting an improvement in shareholders' remuneration thanks to solid core capital generation. Here at the Lab, we are not providing any material changes in our estimates, and we are confident in the sustained company's earnings growth, lower volatility, and higher shareholders capita distribution. The latest results should support a share price re-rating. Therefore, our buy rating is then confirmed .

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